Any purchase in the real estate industry is a huge investment, but even more so when you’re buying commercial. Yet, we rarely talk about and discuss how imperative doing your due diligence on these deals is. An investment can go south very quickly unless you play the game one step ahead of the competition and seller. After decades of experience, we’re sharing the ten most common due diligence mistakes commercial buyers make. As the old saying goes, “learn from other’s mistakes” and make sure you make the best commercial deal possible.
#1 Not Valuing the Property Correctly
Do your research! Be conservative when it comes to underwriting your deal and make sure you seek out multiple sales camps and other available properties that are in your market. Make adjustments as needed and always refer to the experts if needed— Active commercial brokers are always a great resource.
#2 Not Checking In on Current Leases
There can be “loop holes” built into leases such as cancellation provisions, contraction provisions, caps on pass-through expenses, and fixed option rents, that can cause you unwanted headaches and profit. It’s important to have an experienced real estate attorney read current leases if you are not familiar with commercial real estate leasing process.
#3 Not Getting the Full Picture of Your Lender’s Underwriting Requirements
Before you invest your time, energy and money into a property make sure to consult multiple lenders and have in-depth discussions with them about your potential property. Lenders are very conservative and will want to consider physical condition, sale and lease comparables, leases in place, intended use, environmental issues, credit worthiness of purchaser before they contract with you.
#4 Assuming the Property is Up to Date and Complies with Municipal and Building Codes
When it comes to investing in a property, it’s good to be skeptical. Ask questions about the building’s compliance with codes so that you are informed about what extra costs may be hidden within a property– You’ll want to know before your contractor is surprised when they go to get permits.
#5 Assuming Lenders will Accept Any Third Party Report
Don’t spend money on third party reporting until you check and double check that your lender will accept this type of report. This goes for the Property Condition Assessment, Environmental Reports, or any specialized reports, such as seismic or geological studies. You won’t want to pay two different vendors for the same information.
#6 Trusting that You Know All the Facts
You have to perform your due diligence when it comes to getting all the facts on a property, and sometimes that means conducting your own investigation.Remember the Latin saying caveat emptor — let the buyer beware. Get the answers to your questions in writing, just in case you ever have to bring it to court one day. Never assume the seller is telling you the whole story.
#7 Not Taking the Time to Walk Through Every Unit
Even if you feel like you are being a nuisance, it is imperative that you see each and every unit in the property you are about to invest time, money, and energy in. The thing is, you wont know there is a problem unit until you investigate yourself— too many times there are building issues, mold issues, to fire hazards that investors don’t know about until it’s too late.
#8 Ignoring the Competition
Be sure to check out the competition in your area. You need to be the expert on the area you are planning on investing in. If other properties are promoting rent specials or other deals you need to know they exist and why because they might affect your underwriting and valuation of the deal.
#9 Expecting No Issues with the Closing Statements
Scrutinize all items listed on the closing statement. Too often sellers claim items to be credited to themselves are “forget” that they technically should be credited to the buyer.
#10 Not Spending More Time at Your Property
The more you are around the property you are interested in, the more you will learn about it— What sorts of people hang out in the parking lot, what tenants are like, traffic patterns— These are all things you will want to know, and might even change your mind on your investment.